Chap_13 - Chapter 13 The Economics Of Information Purpose...

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Chapter 13 The Economics Of Information Purpose: To describe how various characteristics of information affect the allocation of resources, efficiency, and the ways in which transactions occur. The focus is on how a potential buyer uses information in deciding whether or not to complete a transaction. Length: 22 pages Time required to read: Slightly more than one hour. The chapter has fewer design features than other chapters, but the examples and cases are generally familiar to beginning students. Examples and references to the Economic Naturalist carry much of the burden of explaining concepts and tools. Number of lectures required for understanding: Because students are generally familiar with the topics, the chapter can be covered in 1 ½ lectures. However, the fact that themes are familiar means that students will want to discuss the themes and their ramifications. Each major section can easily lead to a full class-period of discussion. Summary An example based on bargaining for a carved wooden bowl shows how information affects prices and transactions. This is translated into the canons of Adam Smith’s “invisible hand,” and, by projection, to the perfect knowledge requirement of perfect competition. The introduction challenges the student to understand when added information will add to effectiveness of decision making. The first major section deals with the time-honored question of whether a middleman (or a sales staff) actually adds value to a product. The second section deals with the optimal amount of information that a potential buyer should absorb and try to utilize. This section closes with an
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analysis of the economics of the search. Expected values of a risky situation are introduced and students are asked to calculate probabilities and expectations. Used cars – a familiar example – are used to explain aspects of asymmetric information – the situation that occurs when one party to a potential transaction has considerably more information than the other. The “Lemons Model” and credence aspects of transactions are also based on the market for used automobiles. The section continues with discussions of other types of asymmetric information. The chapter ends with a complex treatment of “disappearing political discourse” which explains why politicians tend to skip over discussions of very important public issues. Students are challenged to find similar situations in other aspects of life. The materials at the end of the chapter offer numerous possibilities for in-class discussion. Outline 1. Introduction 2. How the Middleman Adds Value a. Recap 3. The Optimal Amount of Information a. The Cost-Benefit Test b. The Free-Rider Problem c. Two Guidelines for Rational Search d. The Gamble Inherent in Search e. The Commitment Problem When Search is Costly f. Recap 4. Asymmetric Information a. The Lemons Model b. The Credibility Problem in Trading c. The Costly-to-Fake Problem d. Conspicuous Consumption as a Signal of Ability e. Statistical Discrimination
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This note was uploaded on 03/30/2008 for the course ECON 002 taught by Professor Mcleod,markpehlivan,ayseozg during the Summer '08 term at Penn State.

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Chap_13 - Chapter 13 The Economics Of Information Purpose...

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